Banking on BangaluruBrigade enterpise limited has entered the capital markets with an offer of 166.24 lac shares of Rs. 10 each at a price band of Rs. 351-390 per share. Investment Guru is of the view that realty and infrastructure sector would continue to be in limelight as it makes deeper inroads in the world of stock markets. Brigade enterprise’s business model comprises of a mix of residential, commercial and hospitality properties. The company’s operation and land bank are focused in and around Bangalore. Exposure of the company to a limited geographical area and a lean land reserve of just 44.16 million square feet might put a dent on the margins in future. However, the bright side of the picture is that the company has sizeable ongoing projects which would keep the scorecard ticking in the medium term. On valuations parameters the stock looks aggresively priced leaving little scope of appreciation for Investors. The issue also has a green-shoe clause which would be used to provide stability to the price of the stock for one month if the market price falls below the issue price. Investors should consider subscribing to the issue purely from listing gains perspective. For long term perspective, there are better players available in the secondary markets with sizeable land bank and better geographical spread.

Issue highlights

BEL is a real estate development company based in Bangalore, primarily focused on the development of residential, commercial and hospitality properties in South India. Company’s residential properties includeintegrated lifestyle enclaves and apartment buildings targeted towards middle income and high income customers.

The company has completed a total of 67 properties, comprising of 41 residential properties, 21 commercial properties and five hospitality properties, aggregating to approximately 5.67 million sq. ft. of Saleable Area and approximately 6.74 million sq. ft. of Developable Area.

The company is currently developing 16 properties, including Brigade Gateway and Brigade Metropolis, which are integrated lifestyle enclaves and that comprise of a combined Saleable Area of approximately 10.83 million sq. ft. and a combined Developable Area of approximately 11.89 million sq. ft.

Consolidated total income was Rs. 4,170.20 million for the fiscal year 2007 as compared to Rs.2,032.32 million for the fiscal year 2006 and Rs. 1,605.03 million for the fiscal year 2005, representing year over year increases of 105.19%, 26.62% and 109.38%, respectively.

The consolidated profit after tax was Rs. 714.98 million for the fiscal year 2007 as compared to Rs. 423.06 million for the fiscal year 2006 and Rs. 198.77 million for the fiscal year 2005, representing year over year increases of 69.00%, 112.84% and 85.06%, respectively.

Transforming the power equationTRIL has entered the capital markets with a public issue of 29.95 Lac shares of Rs. 10 each at a price band of Rs. 425-465 per share through book building process. Investment Guru is of the view that Power transmission and distribution is an integral part of the power sector’s growth story and Transformers play a pivotal role in this process. TRIL is one of the major players in this segment. However, in this case too the promoters have not left much on the table for the investors as similar companies are available at same valuations in the secondary markets. One can apply for the issue with a view of moderate listing gains on listing. However, from a medium term perspective investment in peers such as Indo-tech transformers is also advisable as the company is operating on better margins.

Let’s take a look at the company

TRIL is one of the major players in the Indian markets manufacturing a wide range of transformers ranging from power generation, transmission and distribution transformers, industrial transformers and a wide range of speciality transformers.

The company currently operate through two manufacturing units, located at Changodar, near Ahmedabad and Odhav, in Ahmedabad, both in Gujarat

Key customers include utilities and power transmission companies. The company has also exported transformers to countries such as the England, Canada, United Arab Emirates, South Africa, Saudi Arabia and Indonesia.

Company’s business strategy is to focus on manufacturing of high capacity transformers at the proposed manufacturing facility at Moraiya since high capacity transformers command better margins.

The company intends to leverage its relationships with the power transmission companies to take up turnkey projects for setting up sub stations.

TRIL has a healthy order book position of Rs.319 crore as on September 1, 2007 with most of the contracts having an embedded price variation clause, shielding the company from adverse movement in prices of key raw materials like copper and steel. TRIL has strong in- house design capabilities which is a key success factor for this industry as transformers are custom built as per the requirements of the customer.

CARE has assigned a 'CARE IPO Grade 4' to the IPO which indicates above average fundamentals.

Power transformers constituted 77% of total sales of the company in FY07 followed by furnace transformers (13%) and others (10%). Sales to State electricity utilities constituted 51% of total sales of TRIL for FY07 with the remaining to industrial and other sectors.

During FY07, TRIL's total income grew by 69% over FY06 on account of increase in sales volume as well as per mva realisations. The company was able to sell higher mva (80 and above) transformers in FY07 as compared to FY06, where margins are better.

TRIL's PAT margin also improved to 7.99% in FY07 as compared to 5.8% in FY06. ROCE and RONW were high at 62% and 54% in YQ7 as compared to 42% and 43% in FY06 respectively.

EPS for the six months ended September,2007 (annualized) is Rs. 20.4 (post issue equity) which translates into a PE multiple of 23.

BGR Energy systems has entered the capital markets with a public issue of 91.36 Lac shares at a price band of Rs. 425-480. Investment Guru is of the view that the company is into the powerful business of Power equipments and hence has potential to deliver excellent performance given its unique business proposition, government’s thrust on this sector and the demand supply mismatch.

However, the promoters have been greedy in pricing the issue and the issue at the higher band is asking for a valuation in line with those of Blue-chips like BHEL and L&T. ICRA has assigned Grade 3 to the issue indicating Average fundamentals. I would prefer to stay away from the issue (though it is commanding a premium in grey market even at this aggresive pricing) since the current fundamentals do not justify such a high valuation and I would not like to pay a price today for the three year forward earnings of the company given the risk factors (see below). I would suggest that investors with long term view or high risk takers should only invest in the issue.

What’s Good about BGR Energy ?

The company is well placed in its business of power projects which provides turnkey Engineering, procurement and construction (EPC) and Balance of plant (BOP) services given the limited players in the space and huge business opportunities due to focus on power sector.

BGR plans to open a marketing office in Dubai to ensure proximity to clients and to open a manufacturing facility in China to expand manufacturing capabilities.

Company boasts of a strong order book of Rs. 33212 million which brings visibility to its earnings.

The company has in house designing and engineering capabilities which provide significant cost advantage.

BGR has a proven track record of executing 130 contracts in 42 countries in Asia, Middle east, Africa and Eurpoe.

The company has come along way from a subcontractor to securing direct orders from power generation companies.

The company has posted a strong growth in both top line and bottom line over past two years. For the Quarter ended 30th June the company posted a top line of Rs.239 crore and Net Profit of 17 crores.

The company has carried out Pre IPO placement of its shares to CVC (20.88 Lac shares) and Reliance Capital (14.4 lac shares) at a price of Rs.450.

The issue proceeds would be utilized in augmenting the working capital and establishing manufacturing and assembling facilities.

The company generates a Return on Net worth of 39% which is higher than that of L&T and BHEL.

What’s not good about BGR Energy ?

The company is dependant on few customers for a major chunk of its revenue. The Top three clients contributed 48% of the topline.

Major chunk of the revenue (73%) comes from its business with government entities and hence the business is prone to delays in execution of the projects based on political developments and changes in budgetary allocations.

The company has a very high account receivable collection cycle (as high as 180 days). This puts a burden on the working capital position of the company and could be a limiting factor in optimizing the operational and financial efficiencies.

Pricing Risks – Most of the projects executed by the company are on a fixed price basis. For 18 months ending 31st March 2007, 90% of the total income was derived from fixed price contracts. Though the company enters into back to back contracts from suppliers, pressure on margins due to rise in input costs cannot be ruled out and would adversely impact the company’s performance.

The annualized EPS on the results posted for Quarter ending 30th June,2007 stood at 9.7 which translates into a PE multiple of 50. This makes the issue priced in line with valuation of much stronger, capable and dependable companies like L&T and BHEL.

The Net asset value per share comes to 12.8 which shows that the IPO price is 37.5 times its Net asset value. This makes issue quite expensive.

As per NSE circular, Equity Shares of Edelweiss Capital Limited would be listed on the stock exchange on Wednesday, 12 th december,2007. The Stock is currrently commanding a huge premium of Rs. 700 on the offer price of Rs. 825 per share in the Grey market.

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